GROW Pakistan QUALITY OF LIFE... ... human development ... CREATIVE CITIES urban development… QUALITY GOVERNANCE... …institutional strengthening ... community engagement ENERGETIC YOUTH... ... VIBRANT MARKETS ... innovation PAKISTAN: FRAMEWORK FOR ECONOMIC GROWTH May 2011 PLANNING COMMISSION GOVERNMENT OF PAKISTAN My message to you all is of hope, courage and confidence. Let us mobilise all our resources in a systematic and organised way and tackle the grave issues that confront us with grim determination and discipline worthy of a great nation. – Muhammad Ali Jinnah
The Planning Commission is pleased to present the Framework for Economic Growth as approved by the National Economic Council in its meeting held on 28 May 2011 under the Chairmanship of the Prime Minister of Pakistan. Commendations The Growth Strategy is critical to Pakistan's future – in the medium term, sustained steady growth represents the only hope of addressing poverty and of boosting the livelihoods of all citizens. The strategy is correct that space must be made and maintained for private sector development and that reducing the role and improving the efficiency of government is fundamentally important.
This requires deep reform rather than funding, a broad public debate and complete commitment by government. I engaged with the Pakistan Growth Strategy at several stages, commenting on papers and meeting the Deputy Chairman and his colleagues. --- Prof. L Alan Winters, Chief Economist, DFID This growth framework concentrates on three key aspects. First, it encourages competitive and inclusive markets. Second, it addresses some long-term structural issues by recommending policies and reforms that will encourage productivity and innovation, promote better urban management, increase connectivity and youth engagement.
Third, it outlines a vital role for the government, where it performs regulatory functions to ensure a level playing field for all economic agents, provides the basic infrastructure like water and power and national public goods—such as defence, justice, and security—that are the basic functions of a government. I have been fortunate to be a part of the strategy formulation and look forward to supporting Planning Commission in operationalising this strategy by dialogue especially with the Provincial governments, private sector and civil society. --- Dr. Hafiz A.
Pasha, Former Finance Minister and Deputy Chairman, Planning Commission This is a great concept paper. I hope it gets the authorisation to workout the detailed plans with the help of all the stakeholders for a sustainable and equitable economic growth. --- Mr. Shaukat Tarin, Former Finance Minister Pakistan has no choice but to move in this new direction because the traditional growth model with its emphasis on public investment and government involvement in economic activity has not yielded the high growth rates the country needs to absorb the expanding young labour force.
Furthermore, the government faces domestic and foreign financing constraints and it simply cannot afford any longer to undertake large-scale capital expenditures. If adopted, the New Growth Framework has the potential to transform the Pakistan economy into one that can compete effectively with the other high-growth developing economies of the world. --- Dr. Mohsin S. Khan, Former Director, IMF 1 Pakistan: Framework for Economic Growth What has struck me most in the process of developing this growth strategy is ust how much effort has been put into seeking and developing a buy-in for it from multiple and diverse stakeholders and communities. The intense and honest effort that has been invested in trying to create a national conversation around the growth strategy is remarkable, not just for Pakistan but anywhere in the world. Strategies sink and swim, not only by their intellectual content but also by the political and societal support that they command.
I applaud the architects of this strategy for having worked so tirelessly in creating a base of public understanding for the economic problems Pakistan faces and a broad-based national conversation on the type of solutions that are needed. --- Dr. Adil Najam, Professor, Boston University I have been intimately involved with planning in Pakistan for 13 years, and with planning in Korea, Malaysia, Vietnam, Thailand, and Egypt for over 10 years. I have seen at very close hand how each of these countries responded to the specific challenges that circumstances imposed on them.
I must go on record that in view of the constraints impacting on the Pakistan economy, the strategy proposed by the Planning Commission is a brilliant answer to a most difficult situation. It seeks to generate the rapid growth that is absolutely necessary; it seeks to do this with a minimum of public sector resources; it seeks to do this while increasing the productivity of the economy; and it seeks to do this in the most efficient manner. I am very proud to be associated with the present effort in Pakistan to develop a growth strategy that could help the country work its way through a most dangerous period. -- Dr. Khalid Ikram, Former Advisor, World Bank It was indeed a pleasure to have been associated with Dr. Nadeem Ul Haque and the planning Commission on the formulation of Growth Strategy. I appreciate the challenging task initiated by the Honorable Minister for Planning & Development Division. --- Dr. Nuzhat Ahmed, Director, Applied Economics Research Centre, Karachi It was indeed an honour (for me) to visit Planning Commission and be part of the team engaged in drafting the document - Pakistan: Framework for Economic Growth (also called the New Growth Strategy).
The Economic plan proposed in the New Growth Strategy identifies major problems faced by the country and suggests policies to be implemented in the medium- to long-term to redirect the economy to its potential level of growth (above 7 percent per annum). The main focus of the proposed policies is, for Pakistan to achieve a sustainable growth through improving productivity and efficiency of the economic factors. I commend the growth team for completing a comprehensive document in a short period.
Finally, I fully endorse the proposed economic plan under the Framework for Economic Growth. ------Dr. Ahmed M. Khalid, Professor, Johns Hopkins Pakistan: Framework for Economic Growth 2 Foreword Planning Commission is charged with developing growth policy and managing the Public Sector Development Program. In keeping with this mandate, I have the honour and the privilege to present the New Growth Framework (NGF)—a strategy that seeks accelerated and sustained growth and development based on economic reform and an emphasis on productivity.
The NGF is based on widespread local and international consultation developing strong local ownership for a quality development strategy that is informed by the best knowledge and analysis available. Pakistan has struggled with a chronic fiscal problem often sacrificing growth for shortterm stabilisation. Examples in this regard are frequent reliance on distortionary tax and tariff policies and the instrument of first choice for controlling expenditures—a cut in development budget. Yet, our growth policy is little more than development projects and some ‘incentives’ to industry, agriculture and exports.
While incentives have hindered fiscal consolidation, sustained high growth has eluded us. Our development projects for building required human and physical infrastructure have not been able to impact growth and private investment because of continued cuts and inappropriate project selection. While the projects do generate employment and economic activity in the first instance, they lack strategic direction and coherence that is required for sustained high growth and the delivery of sustainable development benefits.
We have a young and growing population. Growth has been sporadic and inflation remains a problem. Our calculations also suggest that if we do not accelerate growth to over 7 per cent per annum on a sustained basis, the coming increases in labour force cannot be absorbed. Unfortunately, for the past four years per capita incomes have barely grown. Past data suggests that our long run growth is close to 5 per cent per annum. At this rate of growth, a very large percentage of the youth bulge will not find employment.
New approach to growth is required which has the potential to sustain high growth levels remaining within fiscal limits. Accelerating the economic growth rate and sustaining it at a high rate must therefore be treated as a national priority. And this must be achieved when resources are scarce as the country deals with a severe fiscal problem! The old paradigm of project- and government-led growth has to change. This reasoning has led the Planning Commission towards rethinking the traditional growth narrative in Pakistan.
Our “growth diagnostics” reveal several factors that increase the costs of making transactions in Pakistan. Today international indicators suggest that Pakistan has more of a software (management and productivity) problem than a shortage of hardware (physical infrastructure). The strategy emphasizes the need to reduce 3 Pakistan: Framework for Economic Growth economic distortions; improve functioning of domestic markets; create space in cities through proper zoning; energising youth; engaging communities; inducing investment in human and social capital; and enhancing connectivity and interactivity.
Vibrant cities in an enabling environment will be the hotspot for entrepreneurship and innovation, assuring better returns through improved productivity on investments for all investors. In this context it must be understood that the urban-rural divide and the classification of cities has undergone a paradigm shift through demographic changes and the new ‘cities’ of Pakistan which occupy a large part of the landscape. I would like to acknowledge and appreciate the hard work of the Growth Team and staff of the Planning Commission which was put in towards the preparation of this national document.
I extend the sincere gratitude of the Planning Commission to our partners (donors, civil society organisations, and academia) who have been a source of guidance through out this process. Implementing the growth strategy will require serious, sustained and disciplined reform over the next few years. A process of reform beginning with the Planning Commission has been outlined. Reform is a continuing process and it needs to be institutionalised! Dr. Nadeem Ul Haque Deputy Chairman Planning Commission 28 May 2011 Pakistan: Framework for Economic Growth 4 Abbreviations
AERC ADB BASA BV BISP BOI CAA CCI CCOR CCP CDA CDWP CEO CLL CLOT CORFO CPRSPD CSR DDWP DFID EDB ECNEC EFA EOBI ESSI EU FBR FDI FLL GDP GER GIK GST HCM HEC ICOR ICT IIT IIM IMF IPDF IPO IT IU JNR KCR KCDR KPI LECG LPI MDG Applied Economic Research Council Asian Development Bank Bilateral Air Service Agreements Banverket Benazir Income Support Programme Board of Investment Civil Aviation Authority Council of Common Interest Cabinet Committee on Restructuring Competition Commission of Pakistan Capital Development Authority Central Development Working Party Chief Executive Officer Concurrent Legislative List Center for Liver Disease and Organ Transplant Chile’s Technology Business and Incubation Program Centre for Poverty Reduction and Strengthening Social Policy Development Corporate Social Responsibility Departmental Development Working Party Department for International Development Engineering Development Board Executive Committee of National Economic Council Education for All development index Employees' Old-Age Benefit Institute Employee Social Security Institute European Union Federal Board of Revenue Foreign Direct Investment Federal Legislative List Gross Domestic Product Gross Enrollment Ratio (Page 57) Is it Ghulam Ishaq Khan Institute?
General Sales Tax Human Capital Management Higher Education Commission Incremental Capital Output Ratio Information and Communication Technology Indian Institute of Technology Indian Institute of Management International Monetary Fund Infrastructure Project Development Facility Intellectual Property Office Information Technology Innovation Union Japan National Railway Karachi Circular Railways Karachi Centre for Dispute Resolution Key Performance Indicators Law and Economics Consulting Group Logistics Performance Index Millennium Development Goals 5 Pakistan: Framework for Economic Growth MOC MFN MTBF MTDF MTEF MTOE NADRA NAVTEC NCGR NEC NER NEPRA NGO NFC NHA NIA NIF NIP NTB NTC NTCIP NTN PaCCS PARC PASSCO PDF PERI PIA PIDE PHDEB PKR PPP PSDP PSE PTA R&D RBM SBP SECP SJ SME SRO TARP TCP TFP TVE TVET UK UNDP UNICEF UNIDO USA USC WAPDA WWF YES YSLP
Ministry of Commerce Most Favoured Nation Medium-Term Budgetary Framework Medium-Term Development Framework Medium-Term Expenditure Framework Million Tonnes of Oil Equivalent National Database and Registration Authority National Vocational and Technical Education Commission National Commission for Governance Reforms National Economic Council Net Enrolment Rate National Electric Power Regulatory Authority Non Government Organisation National Finance Commission National Highway Authority National Innovation Agency (Thailand) National Innovation Fund National Internship Program Non-Tariff Barriers National Trade Commission National Trade Corridor Improvement Program National Tax Number Pakistan Automated Customs Computerized System Pakistan Agricultural Research Council Pakistan Agricultural Storage and Services Corporation Pakistan Development Review Pakistan Economic Research Institute Pakistan International Airlines Pakistan Institute of Development Economics Pakistan Horticulture Development and Export Board Pakistani Rupee Public Private Partnership Public Sector Development Program Public Sector Enterprises Pakistan Telecommunication Authority Research and Development Results Based Management State Bank of Pakistan Security Exchange of Pakistan Statens Jarnvagar Small and Medium Enterprise Statutory Regulatory Order Tax Administration Reform Project Trade Corporation of Pakistan Total Factor Productivity Town And Village Enterprises Technical and Vocational Education and Training United Kingdom United Nations Development Program United Nations International Children’s Fund United Nations Industrial Development Organisation United States of America Utility Stores Corporation Pakistan Water and Power Development Authority World Wide Fund Youth Engagement Services Youth Service Learning Program Pakistan: Framework for Economic Growth 6 Contents List of Figures List of Tables and Boxes Executive Summary 1 2 3 4 5 6 7 8 9 10 Breaking Out of Our Past Rethinking Our Growth Paradigm Spotlight: Productivity and Innovation Building a Government for the 21st Century Deepening and Maintaining Openness Vibrant and Competitive Markets Creative Cities Connecting to Compete Youth and Community Engagement Implementation: RBM Appendix – Action Matrices Appendix – Consultations for Growth Strategy 8 9 10 17 28 38 57 74 84 93 108 119 129 136 145 7 Pakistan: Framework for Economic Growth List of Figures
Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 Figure 16 Figure 17 Figure 18 Figure 19 Figure 20 Figure 21 Figure 22 Figure 23 Figure 24 Figure 25 Figure 26 Figure 27 Figure 28 Figure 29 Figure 30 Figure 31 Figure 32 Figure 33 Regional Economic Growth 1961–2009 Growth Volatility: Real GDP – Coefficient of Variation Investment and Savings as per cent of GDP, 1971–2009 Structural Transformation 1970–2010 Exports, Imports and Current Account 1980s–2000s Per Capita GDP Growth and Poverty Head Count, 1997–2005 Projected Labour Force Size and its Composition (Millions) Falling Incomes and Rising Unemployment, 2001-09 Pakistan: Targeted Vs. Actual Economic Growth Binding Constraints First Growth Accounting in Pakistan by Decades, 1961-2005 (%) Cross Country Comparison of Labour Productivity Growth (%) Financial Sector Indicators 2000-2007 Impact of Governance on Firm Performance Percentage of Firms Offering Formal Trainings Connectivity–Growth Nexus Impact of Regulatory Quality and Rule of Law on Productivity Reorienting the Role of Government Directions in Reforming
Governance Budgetary Expenditures Reformed Power Sector Structure Pakistan Trade Liberalisation: A Story of Stalled Reform Comparison of Logistics Performance Pakistan: Real Effective Exchange Rate (2005=100) Share in GDP and Growth of Domestic Commerce, 2000-10 The Most Problematic Factors for Doing Business, 2010 Time & Cost of Enforcing a Contract, 2009 (days and % of claim) Housing Sector Issues Governance for Cities Issues Faced by Pakistani Youth and Global Talent Rankings Age Distribution of Population and Education Profile Youth Employment and Illiteracy in Selected Countries Classification of Labour Force & Youth Unemployment (%) 18 19 20 22 23 24 25 26 29 32 38 39 40 46 49 54 57 58 59 63 71 76 80 82 86 87 92 103 105 120 122 122 123 Pakistan: Framework for Economic Growth 8 List of Tables and Boxes
Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Box 1 Box 2 Box 3 Box 4 Box 5 Box 6 Box 7 Box 8 Box 9 Box 10 Box 11 Box 12 Box 13 Box 14 Box 15 Box 16 Box 17 Box 18 Box 19 Box 20 Box 21 Box 22 Box 23 Box 24 Box 25 Box 26 Growth, Investment & Savings 1971 – 2009 (Annual Average) Overall Infrastructure Quality (Out of 139 countries) Property Rights, Markets and Technology (Out of 139 countries) Labour Productivity by Sector, 2007 Yield Gaps of Major Crops, 2008 Productivity Indicators, Actual and Projected, 1981–2030 Improvement in Doing Business, 2009 Average Years of Schooling Subsidies by Federal Government 2005-10 Losses in the Power Sector Subsidy on Gas Demand Forecast for Short-term Average Amount Saved By Business, 2009 Growing Population in Cities Connectivity Scorecard Rankings Economic Growth and Social Safety Institutions Matter! Learning from Growth Experience around the World! Who is Listed at Karachi Stock Exchange? Innovation Councils Current Status of Restructuring The Four Phases of Civil Service Reform in Sri Lanka Monetisation of Perks Advantage of Large Cities – Case of Shanghai, China Major Types of Zoning Observed in Modern Cities Zoning Breakdown and Regulations in Islamabad Dubai Zoning Commercialisation of
Fees in Karachi Impact of Density and High-Rise Rent Control Legislation and Disincentives for Renting Property Endogenous Growth through Connectivity Contribution of Social and Human Networks towards Growth Case Studies on Railways Restructuring Sachivalaya Vahini or e-governance in Karnataka Brain Drain Issues Faced by Pakistani Youth and Global Talent Rankings National Internship Programme Youth is a Solution, Not a Problem! Success of Orangi Post 18th Amendment of Governance of Education and Health Integrated RBM– the Malaysian Experience 21 33 35 40 42 47 47 52 62 72 72 73 91 96 109 24 30 34 45 56 61 65 67 94 97 98 99 100 102 104 109 110 114 117 118 121 124 124 125 126 133 9 Pakistan: Framework for Economic Growth Executive Summary
Pakistan faces many challenges at the beginning of the second decade of the 21st century: • • • • • • • Decades-long struggle with macroeconomic stabilisation arising from unsustainable fiscal policies Pressure of demography Legacy of economic distortions Battering from external events, including earthquakes, floods and a continuing longstanding low intensity conflict A large and loss-making public sector that impedes market development Low and declining productivity Heightened expectations of the population for a better life from a democratic government. Our growth experience of the last four decades has been volatile annual growth and declining trend in long run growth patterns. In addition, productivity growth (a measure of efficiency) has been low in comparison to our comparators. For the last four years per-capita incomes have not increased in real terms while double-digit inflation has prevailed.
Our growth policy has been based on public sector projects and arbitrary incentives– subsidy and protection. The project selection process has considerably blunted the efficiency of infrastructure development while the system of incentives has not allowed the development of a vibrant and competitive marketplace. This growth strategy is a new approach to accelerating economic growth and sustaining it. It has been developed with world renowned experts and all the stakeholders following extensive research and consultation. Our consultations clearly identified the need to develop a coherent approach to growth that goes well beyond projects and targets public service delivery, productivity, competitive markets, innovation and entrepreneurship.
The strategy is based on sustained reform that builds efficient and knowledgeable governance structures, and markets in desirable, attractive and well-connected locations. It recognises the severe resource constraint that the country faces and therefore focuses on ‘productivity’— improving the efficiency with which assets are used. Global indicators such as ‘competitiveness’ and ‘cost of doing business’ also highlight factors such as ‘management’, ‘innovation’, ‘quality of regulation and governance’ and ‘research and development’, as the more immediate constraints to growth. The thrust of this strategy, therefore, is to focus on the ‘software’ of economic growth (issues of economic governance, institutions, incentives, human resources, etc. ) Pakistan: Framework for Economic Growth 10 o as to provide an environment in which the ‘hardware’ of growth (physical infrastructure) could be expanded and made more productive at every level. The strategy argues that growth drivers such as entrepreneurship and innovation could be greatly encouraged by reforming and strengthening institutions such as the civil service, legal and judicial framework, the taxation system etc. The strategy also proposes measures, such as a reform of the restrictive zoning laws, which have impeded the growth of domestic commerce and hampered the role of cities as generators of economic growth. The aggregate of such programs would vastly improve the investment climate, reduce the cost of doing business, increasing the profitability of enterprises and encouraging them to expand.
The strategy also focuses on the improvement of productivity by, for example, increasing competitiveness in the market by easing the entry and exit of firms. In short, the strategy aims to increase investment in the country and to make investment more productive. The strategy proposes special programs to support key parts of the population, such as youth, who suffer disproportionately from unemployment. Targeting Growth Around 68% of Pakistan’s population is regarded as youth (under 30 years). Many of them are now coming into the labour force, increasing the size of the workforce by over 3 per cent annually. It is estimated that to absorb the youth bulge productively, Pakistan's real GDP needs to grow at an annual average rate in excess of 7 per cent.
The strategy recognises that the country cannot jump immediately to these high rates of growth from the current low growth rate of about 3 per cent per annum. • At the first stage, efforts will be undertaken to revive the economy to its shortterm potential GDP growth rate of about 5–6 per cent a year. If issues regarding energy governance are resolved and some credible macro stability reached–this could be achieved in a short time. The strategy also suggests deep and sustained reforms–in areas such as public sector management, developing competitive markets, urban management and connecting people and places—as a way forward for accelerating growth to above 7 per cent. • What Constrains Pakistan’s Economic Growth? Growth diagnostics point to two important constraints to economic growth: 1.
Inadequate market development, (lack of competition, tax, tariff and policy distortions, entry barriers, government involvement, poor regulation, etc. ), and 2. Lack of efficient public sector management to (a) provide core governance goods such as security of life, property, transaction and contract, (b) facilitate markets 11 Pakistan: Framework for Economic Growth and investment with informed policy and competent regulation, and (c) promote deepening of physical, human and social infrastructure. This growth strategy is informed by the latest in economic thinking and seeks to strengthen both government and markets. It is not a ‘government versus markets’ approach but a ‘government and markets’ approach. An efficient government underpins a vibrant market.
Much of the proposed reform is to get the roles of government and market in balance to develop efficiency within and between the two. The Need for Productivity Economic growth happens through the accumulation of labour and capital and through the efficient allocation of these assets—known as Total Factor Productivity (TFP). The contribution of productivity in the growth of Pakistan's GDP has been less than impressive. During the period 1960 to 2005, 80 per cent of the GDP growth rate in Pakistan was explained by capital accumulation and labour expansion and only 20 per cent by TFP. Labour productivity in Pakistan is growing at a comparatively lower rate than neighbouring countries.
Research suggests several reasons, including market quality, poor governance, limited urban development, inadequate education, lack of competitive goods and factor markets, inadequate foreign competition and limited research and development capacity. Systems need to be built for monitoring and measuring productivity to motivate reform for sustained efficiency increases. Building a Better Government Our analysis and consultations have shown poor governance and dysfunctional markets to be among the most important reasons why growth in Pakistan has not achieved a sustained acceleration. Currently the government is an active player in every sector, as a direct market participant and competitor, obstructing private sector entry.
The footprint of the government has been estimated to be as large as over 50 per cent of the national income, making it very difficult for the private sector to expand. Research by the Competition Commission of Pakistan has also established that government intervention is impeding the development of competitive markets. Better government should be established following a two-pronged approach a) reorienting the role of government–which focuses on an exit from markets and deeper deregulation, and b) improving public sector management–which includes reforming civil service, improving resource mobilisation, elimination of untargeted subsidies (particularly to loss making public sector enterprises), efficient public investment through results-based management.
Deepening and Maintaining Openness While announcing export promotion in some sectors, policy has relied heavily on import substitution in others. Consumers have paid the price for these policies, through taxation for export subsidies and through high prices and sacrifice of quality goods where import substitution policies prevail. Meanwhile, innovation and entrepreneurship have suffered as the incentives are skewed in favour of lobbyists (rent seekers) rather than reliance on competitive markets. Pakistan: Framework for Economic Growth 12 The growth strategy advocates liberalisation of trade and investment regime to be a critical ingredient for sustained economic growth that in turn creates jobs, and raises productivity and wages.
Unfortunately heavy protectionism was reintroduced in Pakistan during the second half of 2000–10, which brought back distortions in the overall trading system. Major distortionary policies adopted include (a) reversal of tariff cuts and increased tariff dispersion, (b) reversal of a number of liberalising reforms in agriculture, notably in wheat, sugar and fertilizer policies, (c) high and steeply escalated tariffs in specific industries, e. g. the auto-industry, following strengthened intervention by the EDB, (d) active use of WTO compatible regulations to restrict imports—including quasi-import licensing mechanism, (e) introduction and rapid expansion of anti-dumping practices, and (f) continuation of the long standing ban on imports from India.
The growth strategy recommends a) re-establishment of the unilateral trade liberalisation program, b) immediate abolition of the present system of distortive regulatory duties (SROs) that interfere with the tariff structure, c) maintain, de minimis, a neutral real exchange rate policy, d) immediate abolition of the ad-hoc system of quasi-import licensing being administered by EDB and various line ministries, e) thorough review of the economic justification for sectors/industries benefiting from above normal protection and/or subsidies, export subsidies, export taxes, and anti-dumping practices, and f) all economic policies including industrial and trade policies should be in line with the intentions defined in this growth strategy. Vibrant and Competitive Markets The growth strategy presents a clear road map for developing vibrant markets.
Public enterprise reform and privatisation where necessary, will make space for increased entrepreneurship. Several markets require the government to move from producing and directly participating in markets to just regulation. For example, the current regulatory framework represses domestic commerce (retailing, warehousing, and transport) and construction and city development. Heavy government direct participation in agriculture, storage, transport, construction, to name a few, is stifling investment. Openness and city development combined with focussed public sector management would go a long way towards developing innovative markets. Creative Cities Almost half of the world’s population lives in cities, producing more than 80% of global GDP.
Dense high-rise cities are more productive, more inclusive and offer more than suburban sprawls which our city-planning paradigm favours at the cost of agriculture and the environment. In order to make cities as hubs of commerce, our growth strategy proposes a) relaxing of zoning and building regulations to allow space for mixed-use activities, energy efficiency, and facilitate vertical expansion of cities, b) privatising unproductive state owned land, c) encouraging foreign developers to compete in the Pakistani market, and d) focusing on research and development in low-cost energy efficient construction techniques. 13 Pakistan: Framework for Economic Growth Connecting to Compete Commercial activity requires dense well-connected cities and communities. Connectivity is critical stratagem of the growth framework.
While our PSDP has built physical infrastructure, given significant fiscal constraints, private investors should be encouraged to participate in development projects. In this regard, rules pertaining to project approvals, land acquisition and NHA Act must be revisited in line with promoting public-private partnership. Government should also consider its current policy of rewarding the loss-making enterprises such as NLC, Railways, and PIA etc. for their inefficiencies through consistent subsidies. Competition should also be encouraged at the domestic level by limiting regulators’ role to regulating, e. g. CAA should not be responsible for running the airports but should concentrate on policy formulation and its implementation.
Commercial routes, whether railroad or aviation, where multiple operators cannot operate due to congestion or some other limitations must be auctioned instead of giving a preferential treatment to any individual operator. In order to facilitate businesses, the country’s custom posts should be automated so that clearance time could be reduced. Custom processes at dry ports should be computerised in order to reduce congestion at the seaports. Pakistan will have to keep pace with trends in international connectivity. This will require strong efforts. Government should also pass electronic signatures act which should provide legal cover to the use of digital IDs. The use of ICT services, if encouraged across the board in the public and private sectors can greatly reduce the costs related to transport and logistics.
Youth and Community Engagement The youth bulge is becoming eminent in coming years and it will change the age structure of the labour force over the next couple of decades. More than a third of youth currently lives in urban areas and their share is expected to reach 50 per cent by 2030. Compared to other growing economies of the region, Pakistan has a relatively large proportion (32%) of uneducated youth mostly with no vocational and life skills, who end up in elementary occupations or remain either unemployed or inactive. There is a need to provide for their health, education, and livelihood, and engage them in activities which convert their latent energy into positive outcomes for family, community, state and the global community.
This is only possible through provision of quality basic and college education, market led skills development, instituting National Youth Service Policy Reforms, redesigning and rezoning cities to create space for youth, promoting nano- and micro-youth enterprises at local level through targeted youth entrepreneurship programs in major civic centres, promoting youth citizenship through civic engagement, promotion and continuum of youth sports and activities that encourage and support the development of active and engaged young people, National Youth Volunteer Services, programs to foster youth reproductive and general health, and establishment of Youth Service Learning Program with the help of educational institutions and civil society that integrates community and social service with academics. Pakistan: Framework for Economic Growth 14 Implementation: Results Based Management “Who will implement? ” is probably the most frequently asked question in Pakistan. This is so, because many good policy proposals and plans have been prepared but were never actualised.
Our consultations have shown us that one reason implementation is poor in Pakistan is because plans are expected to be implemented by the very system that needs change. More often, there is no process or system in place for making change happen. The new vision for economic growth will require: • • • • Periodic identification of emerging constraints to economic growth through research and dialogue with all sectors and stakeholders Consensus building through extensive consultations on the reforms and programmes that will be required for alleviating these constraints Building a system for measuring productivity and public service delivery Developing and monitoring quantifiable plans regularly
Under the post-18th Amendment milieu, the Planning system will exercise control over the development process through: • • Consultation, setting medium-term and annual development objectives for the government and for relevant ministries Identification of key economic reforms that are required for these objectives, development of quantitative indicators (which can be monitored) for these reforms and monitoring and reporting on them to government and the people Specifying government- and ministry-level reporting requirements for development results and their costs, to ensure accountability and track progress Strengthening the capacity of ministries and, by interaction and evaluation, ensuring that their strategies and services support national development priorities Developing capacity of planning system to act as an institution that develops and oversees the government’s reforms agenda • • • Six critical changes have been identified that need to be introduced to strengthen the linkage between the Planning Commission and government performance. These are: 1. Strengthen the Medium-Term Development Framework (MTDF) and the Medium-Term Expenditure Framework (MTEF) for setting medium-term priorities in line with growth strategy and reforms agenda 2.
Support a unified results-based budget preparation process 3. Decentralise responsibility for projects to line ministries 4. Redefine the Planning Commission’s role and processes in respect of major capital projects 5. Establish a results-based monitoring and evaluation system. 6. Planning Commission should lead the reform and change process through identification and advocacy of critically required changes in policies. 15 Pakistan: Framework for Economic Growth Pakistan: Framework for Economic Growth 16 1 Breaking Out of Our Past ‘Some men tend to cling to old intellectual excitements, just as some belles, when they are old ladies, still cling to the fashions and coiffures of their exciting youth. – Jane Jacobs At the beginning of the second decade of the 21st century, Pakistan faces many challenges: • • • • • • Decades-long struggle with macroeconomic stabilisation arising from unsustainable fiscal policies Pressures of demography Legacy of economic distortions from previous policies Battering from external events, including earthquakes, floods and a continuing war Low and declining productivity Heightened expectations of the population for a better life from a democratic government We need a bold new approach to seek sustainable and inclusive development and we must do this bearing in mind the resource constraint arising from our difficult fiscal situation. Goals and Objectives Growth strategy must be bold, seeking to generate opportunities The goal is to maximise opportunity for all citizens so that they can obtain a better life through their hard work and ingenuity.
Pakistan's population, until recently, was growing at 3 per cent annually, however is now increasing at an annual rate of about 2 per cent. As a result, our labour force is expected to grow at over 3 per cent annually over the coming years. To absorb this addition to the labour force, the GDP needs to grow at a rate of around 7 to 8 per cent annually and must be sustained in the coming decades. 1 The growth strategy must be bold, seeking to generate opportunities— employment and entrepreneurial (self-employment) opportunities. This is the policy goal! Recent thinking on growth indicates that growth generators need not be governments, but cities, asset classes, commodities, products, firms and people.
Growth should not be difficult for those starting far behind since the recipe is long known and well established; give the vibrant young people quality education, new ideas and high ideals, strive for institutions that support free and fair markets, create a professional, well trained civil service, achieve economies of scale through a large domestic market and Goal is to maximise opportunity for citizens through hard work and ingenuity A number of studies have shown that the elasticity of employment with respect to GDP growth is about 0. 5. This means that a one percentage point increase in the GDP growth rate leads to a one-half percentage point increase in employment. 1 17 Pakistan: Framework for Economic Growth open up for trade and investment; and, keep public spending on infrastructure and social sectors limited and focused only to critical and essential projects. 2 A Past of Volatile Growth and Poor Economic Governance
The history of global economic growth indicates that: a) past five decades have seen extraordinary growth worldwide, b) many developing countries sustained rapid growth for extended periods and achieved substantial increases in incomes for their populations, c) for the most part this growth came from policy reforms that provided macroeconomic stability, encouraged markets and embraced greater openness to trade and investment, d) there exist examples where high growth has been maintained for over quarter of a century (Japan 1951–88, China 1979–03, Korea 1954–98), and e) most of the extended declines in per capita income involve a collapse in governance. 3 Between 1972 and 2010, Pakistan’s GDP grew at an average annual rate of about 4. 9 per cent. However, our growth was volatile and showed a declining trend (Figure 1).
In contrast, other regional economies such as India, Sri Lanka and Bangladesh, showed less volatility (particularly in recent years) and more importantly the trend in growth rate in these countries was increasing overtime. Figure 1 Regional Economic Growth 1961–2009 Between 1972 and 2010, our GDP grew at an average annual rate of about 4. 9 per cent. However, growth was volatile and on a declining trend Source: World Development Indicators W Buiter and E Rahbari, ‘Global Growth Generators: Moving beyond Emerging Markets and BRIC’, Global Economics View, Citigroup Global Markets, February 2011. 3 NH Stern, JJ Detheir & FH Rogers, Growth and Empowerment: Making Development Happen, MIT Press, Cambridge Massachusetts, 2005. 2 Pakistan: Framework for Economic Growth 18
Figure 2 further reinforces two important features of volatility of growth in Pakistan: • First the coefficient of variation (a measure of fluctuation in relation to the average) is higher for Pakistan than that of other regional economies, particularly for more recent periods Second Pakistan’s variation occurs around a declining trend rate • Together these highlight increasing uncertainty in our economic outlook. In turn, this uncertainty deters investment. Figure 2 Growth Volatility: Real GDP – Coefficient of Variation Source: Computed from UNDP Data Contemporary thinking in economic growth literature explains that key determinants of growth today are economic governance and human capital. 4 The usual variables such as investment and savings should be regarded as endogenous to the system. This implies that we are in search of factors that allow space and freedom to invest productively.
Economic growth is delivered and assets are accumulated through competitive markets and use of existing and new technology, productivity-inducing knowledge and business models. Key determinants of growth today are economic governance and human capital This view in no manner understates the importance of capital formation overtime. Figure 3 points to two important reasons for Pakistan's relatively slower GDP growth compared with countries in its neighbourhood. • First, it has been investing a smaller share of its GDP than its neighbours. In virtually all countries in our region, the ratio of investment to GDP has shown a steady increase between 1971 and 2009 Second, the share shows signs of decline •
K Ward, The World in 2050, HSBC Global Research, January 2011. See also RJ Barro, ‘Determinants of Economic Growth: A Cross-country Empirical Study’, Journal of Comparative Economics, vol. 26, no. 4, pp. 822-824 and World Bank Policy Research Report, The East Asian Miracle: Economic Growth and Public Policy, World Bank, 1993. 4 19 Pakistan: Framework for Economic Growth A crucial question for accelerating GDP growth in Pakistan, therefore, is how to raise the investment rate, and how to increase its productivity so that the country can derive higher output at each level of investment. These are the two critical issues that this growth strategy is designed to address.
Investment and Savings as per cent of GDP, 1971–2009 Figure 3 Source: World Development Indicators On a sustainable basis, while a certain amount of investment can be financed through an inflow of foreign resources (whether as external assistance or commercial borrowing), the bulk of investment must be financed by domestic savings. In this area also, Pakistan has performed less satisfactorily than many of its neighbours. During the past four decades (1971–2009) the ratio of fixed investment to GDP averaged only about 17 per cent, and the ratio of domestic savings to GDP merely 12 per cent. This performance compares poorly with the neighbouring countries (see Table 1).
A sustainable basis requires bulk of investment to be financed by domestic savings and not through inflow of foreign resources Pakistan: Framework for Economic Growth 20 Table 1 Country China India Malaysia Indonesia Thailand Pakistan Growth, Investment & Savings 1971–2009 (Annual Average) GDP Growth (%) 9. 1 5. 3 6. 4 6. 0 5. 9 4. 9 Fixed Investment to GDP 32. 2 23. 9 27. 4 25. 9 29. 5 16. 6 Domestic Savings to GDP 37. 9 22. 0 35. 0 29. 2 28. 8 11. 9 ICOR 3. 5 4. 5 4. 3 4. 3 5. 0 3. 4 Source: World Development Indicators The gap between Pakistan's domestic savings and its investment means that about one-third of the country's fixed investment was financed by foreign resources.
The corollary to this reliance on foreign savings was that the performance of Pakistan's GDP became significantly dependent on the availability of such resources — a phenomenon that maintained boom-bust cycles. Foreign injections have on occasion led to sharp upward spikes in growth rate. However, because the resources were not channelled into productive investments, GDP growth has not been sustained beyond periods of external inflows. 5 No strong relationship between public investment and economic growth It has also been argued that there was no strong relationship between public investment and economic growth,6 but it appears that public investment did have some effect in attracting private investment. The episodes of slowdown in the investment rate have also been associated with frequent changes of political regimes and economic policies, and balance of payments volatility. 8 How the Economy has Evolved Services sub-sectors are more value-added, more labour-intensive and have greater potential of growth The economic structure has changed and way forward must seek to build on the ongoing structural transformation. Figure 4 shows that while in the past agriculture was the largest sector in the economy, today it is services. By 2010, the share of agriculture had dropped to about 20 per cent, while that of services exceeded 50 per cent. These changes have significant implications for the growth of productivity and employment. The services sub-sectors by definition are more value-added, more
V Ahmed and C O’Donoghue, ‘External Shocks in a Small Open Economy: A CGE-Microsimulation Analysis’, The Lahore Journal of Economics, vol. 15, no. 1, 2010, pp. 45-90. 6 E Ghani and Musleh-ud-Din, ‘The Impact of Public Investment on Economic Growth in Pakistan’, Pakistan Development Review, vol. 45, no. 1, 2006, pp. 87–98. 7 SNH Naqvi, ‘Crowding-in or Crowding-out? Modelling the Relationship between Public and Private Fixed Capital Formation Using Co-integration Analysis: The Case of Pakistan 1964 – 2000’, Pakistan Development Review, vol. 41, no. 3, 2002, pp. 255–276. 8 SM Naseem, ‘Political Economy of Structural Reforms in Pakistan’, East Asian Bureau of Economic Research, Working Papers, Bangkok, 2008. 5 21 Pakistan: Framework for Economic Growth abour-intensive and have greater potential of growth even under repressive circumstances which lead to curbing of growth in agriculture and industry. Figure 4 Structural Transformation 1970–2010 Source: Economic Survey of Pakistan, various issues Our ability to do business with other countries has also remained uncertain. The trade regime in Pakistan was never grounded in an overarching growth paradigm. We have seen phases of import substitutions, export orientation and revival back towards protectionism. • Figure 5 illustrates the near-stagnancy in the structure of the trade sector. Exports and imports as a percentage of GDP have not changed much in the past three decades. In fact, the ratio of exports to GDP has declined from the average levels seen in the 1990s.
Within the structure of exports it has been difficult for the industrial sector to diversify away from textile manufactures—which again were low-value-added. Pakistani exports are narrowly concentrated geographically, which makes them vulnerable to economic crises in economies such as the United States and the European Union. Finally, policy in Pakistan sought to boost exports through controls on domestic market. These controls included examples such as curbs on domestic consumption, resource utilisation and allocation and market development. 9 The trade regime in Pakistan was never grounded in an overarching growth paradigm • • Exports have failed to diversify • NU Haque, ‘Beyond Planning and Mercantilism: An Evaluation of Pakistan’s Growth Strategy’, Pakistan Development Review, vol. 45, no. , 2006, pp. 3–48. 9 Pakistan: Framework for Economic Growth 22 Figure 5 Exports, Imports and Current Account 1980s–2000s Source: Economic Survey of Pakistan, various issues Inclusive and Sustained Growth is a Policy Imperative! Every year Pakistan adds the equivalent of a New Zealand to its population; every two years, a Switzerland; every three years, a Greece; every four, a Chile or a Netherlands; and every five, an Australia. Pakistan must get on to a path of high and sustained GDP growth as soon as possible. The size, growth, and age distribution of the country's population demands this. Every year Pakistan adds the equivalent of a New Zealand to ts population; every two years, a Switzerland; every three years, a Greece; every four years, a Chile or a Netherlands; and every five years, an Australia. And of course, while it adds these populations, it does not add the assets and institutions of these countries. Another important reason for the country to get onto a sustained high-growth path is the objective of alleviating poverty. Rapid increase in the GDP has proved to be a necessary (even if not sufficient) condition in every country that has managed to reduce poverty by a substantial amount. However, it is not only a high rate of growth that is required, which must also be sustained.
As was discussed previously, the bulge in Pakistan’s working age population is likely to continue for at least 30 years, and these additional numbers need to be provided employment. It is evident from Pakistan’s recent growth experience that growth has caused a significant change in poverty levels. Between 1996-97 and 2001-02 low growth in per capita GDP resulted in an increase in poverty, which started to decline sharply as per capita income grew during the period 2004-05 to 2005-06 (Figure 6). Alleviating poverty is only possible if GP increases at a pace which caters for population growth 23 Pakistan: Framework for Economic Growth Figure 6 Per Capita GDP Growth and Poverty Head Count, 1997–2005 Source: Economic Survey of Pakistan, various issues
It is estimated that between 1979–88 and 1988–94 the growth effect contributed around 84. 9 per cent and 61. 1 per cent reduction in poverty. 10 It has also been shown that during the period 1992-93 to 2005-06 growth had a significant impact on reducing poverty while the redistributive effect was weaker. 11 These results suggest that if additional measures to improve the distribution of income had been taken, the decline in poverty would have been much larger. The strategy aims to make growth more inclusive and thereby speed up the movement out of poverty. Box 1 Economic Growth and Social Safety The strategy aims to make growth more inclusive and speed up the movement out of poverty
To complement the Growth Strategy, the government has already developed an effective and widely respected social safety net—The Benazir Income Support Program (BISP). It is attempting to meet several needs. First, it is based on cash transfers to help in smoothening household consumption and investing in human capital. Second, objective and transparent social safety nets have a positive impact on social cohesion, which assists connectivity (see the discussion on connectivity and its benefits later in this report). Third, the presence of an effective and targeted social safety net allows the government to avoid suboptimal economic policies (for example price subsidies) that interfere with the functioning of the markets; this is especially important in the power and agriculture sectors.
Finally, social safety nets, such as cash transfers, community grants, or public works, help revitalise crisis-affected communities by filling in deficiencies in demand and kick-starting markets that may have shrunk or even closed down. All these factors influence both short-term and long-term economic growth through their impact on employment and productivity. 10 AH Khan and AS Azhar, ‘Decomposition of Changes in Poverty Measures: Sectoral and Institutional Considerations for the Poverty Reduction Strategy Paper of Pakistan’, Pakistan Development Review, vol. 42, no. 4 (Part II), 2003, pp. 879–892. 11 AR Cheema and MH Sial, ‘Estimating the Contributions of Growth And Redistribution to Changes in Poverty in Pakistan’, Pakistan Economic and Social Review, vol. 48, no. 2, 2010, pp. 279-306
Pakistan: Framework for Economic Growth 24 Therefore, for a country with Pakistan's experience of substantial fluctuations in the GDP growth rate, protecting the poor and the vulnerable not only mandates a high and sustained growth of GDP in the future, but this protection, in turn, can also support a higher growth rate. Unless Pakistan can sustain a high level of growth, its streets are likely to be crowded with young men and women desperately seeking jobs, justice, education, and medical attention for themselves and their families and demoralised by not finding them The age-distribution of the population provides another imperative for acting quickly.
Nearly 50 per cent of Pakistan's population is below 20 years of age and over 60 per cent below 30 years. With growing unemployment, these youths become disconnected from the country’s economy and disaffected with its political structure, and are vulnerable to the blandishments of extremists. The demographic projections in Figure 7 show this ‘youth bulge’ will continue to dominate the population for another 30–35 years. Unless Pakistan can sustain a high level of growth of its GDP, its streets are likely to be crowded with young men and women desperately seeking jobs, justice, education and medical attention for themselves and their families, and will eventually be demoralised by not finding them–a breeding ground for anarchy.
Figure 7 Projected Labour Force Size and its Composition (Millions) Source: Based on Medium Variant, UN 2005 The demographic conditions are sufficiently important to warrant a more extended discussion. The population of Pakistan is projected to reach over 350 million by 2050. 12 It is not just the size but its age structure that is important. The number of those aged 0–14 years will start to stagnate after 2035 (due to fertility decline), but the number of the working age group (15–64 years) and the elderly (65 and above) will continue to increase (population echo /momentum). It is the increasing numbers in the working age group that might provide an economic opportunity for the country.
By 2050, more than 236 million people will be in the working age group. Due to the increasing proportion of the population in the working age group, the dependency ratio will continue to decrease, and is projected to reach its lowest point D Nayab, ‘Demographic Dividend or Demographic Threat in Pakistan’, Pakistan Institute of Development Economics, Working Papers, No. 10, 2006 12 25 Pakistan: Framework for Economic Growth in the 2030s. A lowered dependency ratio has positive implications for economic growth, as there are more working people taking care of fewer people (young and/or old), thus improving the probability of more savings and increased productivity.
The dependency ratio is expected to again show an increasing trend by 2050, but this time because of an increase in the old dependency ratio. The demographic changes leading to a lowered dependency ratio are sometimes described as offering the potential of a ‘demographic dividend. ’ The demographic dividend is basically an opportunity provided by the changing age structure when the growth rate of the labour force is higher than the growth rate of the total population. Demography started providing this opportunity to Pakistan in the early 1990s and will continue to do so till 2050, when the two rates will merge. This, however, is just an opportunity, and the dividend has to be earned by the imaginative utilisation of the additional workforce.
On the other hand, an increasingly disillusioned younger unemployed cadre can be a time bomb, waiting to explode. After 2050, this ‘window’ is projected to close. In the longer term, ageing of the labour force is another factor to be considered for the longer-term. The number of new entrants/younger workers (15–24 years) would start to stagnate by 2040, while the number of older workers (50–64 years) would continue to increase. Thus, an increasing number of older persons will have to be provided for by a decreasing number of productive workers. Figure 8 Falling Incomes and Rising Unemployment, 2001-09 By 2050, more than 236 million people will be in the working age group, a huge increase from the 110 million in 2010 Rising Unemployment
Falling Per Capita Income Source: Economic Survey of Pakistan, various issues Sadly the recent growth history is not encouraging for the youth entering the labour force. Figure 8 shows the falling growth in per capita income and rising unemployment levels. 13 A bulge in the working age groups in coming 40 years will increase the economy-wide potential productive capacity. However, if economic growth is not leveraged on a higher trajectory then the coming demographic changes 13 Moreover, it should also be borne in mind that about 30 per cent of the employed are actually “unpaid family help,” and thus not part of wage labour. Pakistan: Framework for Economic Growth 26 ill imply rising unemployment, shortage of assets, difficulties in competing with neighbouring South Asian countries—which will also be benefiting from younger populations during the same period. 14 Pakistan's demography, instead of providing a dividend may well prove to be a nightmare. How Fast a Growth of GDP should Pakistan Target? If economic growth is not leveraged on a higher trajectory then the coming demographic changes will imply rising unemployment, shortage of assets and difficulties in competing with neighbouring South Asian countries The discussion earlier had estimated that Pakistan's GDP needs to grow at an annual average rate in excess of 7 per cent in order to absorb the new additions to the labour force and to start cutting into the ranks of the currently unemployed.
The strategy recognises that the country cannot jump immediately to these high rates of growth from the present performance of under 3 per cent per annum. The first order of business will be to get the actual performance of the economy up to its potential rate. It is estimated that, at the present level of investment and institutional functioning, Pakistan's potential GDP growth rate is of the order of 5–6 per cent a year. Given the right policies and a modicum of good luck, it should not be impossible to get the economy back to a growth rate of between 5–6 per cent in a reasonable time, especially given the extent of unused capacity that exists in the manufacturing sector.
The important second step is to develop policies that will allow growth to accelerate beyond the current potential to above 7 per cent. Through a combination of measures and reforms for increasing productivity, improving economic governance and developing physical and regulatory space for entrepreneurial and innovative investments, the growth strategy seeks to achieve this target in the medium term. The most important step is to sustain this growth for a number of years. The growth strategy argues that this can be done through continued improvements in governance, institutional reforms, and focused efforts to augment human capital. This is precisely what fast growing economies have done and is the direction towards which Pakistan must move. 14
NU Haque, ‘Towards Growth Strategy and Economic Reforms’, Presentation at Pakistan Development Forum (PDF), Islamabad, 2010. 27 Pakistan: Framework for Economic Growth Rethinking Our Growth Paradigm ‘Ideas shape the course of history’. – John Maynard Keynes It is clear that we must aim to attain a high growth trajectory in an era of severe resource constraints. Through lengthy research effort and a widespread local and global consultation, it has been determined that a fresh approach that places much greater emphasis on the ‘software’ of growth—the manner in which markets, cities and communities are governed and organised—than on the ‘hardware’, which primarily consists of physical investment in brick and mortar.
This approach will release the dynamism of entrepreneurship and innovation to accelerate growth considerably in this time of financial constraint. It should be emphasised that the focused public sector investments for infrastructure will continue within the available resource envelope. The growth strategy will only make the process of infrastructure creation and use more efficient, facilitating better utilisation of resources. In this way the infrastructure that is developed will be made meaningful to citizens’ lives. 2 Through a lengthy research effort and a widespread local and global consultation, focus is on a fresh approach that places much greater emphasis on what might be called the "software" of growth
Why is a fresh approach to planning needed? Development planning in Pakistan started in the mid-1950s; growth strategies since then have followed an essentially similar pattern. • • They are characterised by a focus on the arbitrarily set growth and investment rates They provided more or less detailed projections for investment by the public sector with some rather general indications of that by the private sector, even though the latter was described as the major engine of growth They relied on the government playing a lead role through sector picking and market controls • It is perhaps not surprising that the plans had only limited success.
Of the nine Plans that have been prepared so far, only th